Brazil: promising tourism development faces many obstacles

Brazil’s biggest image problem is not violence but ignorance. For its size and diversity, the country remains very little known and surprisingly under-visited, ranking 37th in visitor numbers in 2006, according to the World Tourism Organisation. That number is heading up with growth in visitor number an impressive-sounding 21% between 2003-06, according to Jeanine Pires, president of Embratur, the body that is responsible for promoting Brazil. “More visitors are spending more money in more regions,” she says.

But while the headline numbers look good, overall the trend is for the country to be slipping, albeit genteelly, down the rankings of global tourism. Admittedly, the number of tourists coming in October this year versus the same month last year jumped by over 15%. But with an annualised estimated 4.3% growth over the next ten years, Brazil ranks a pitiful 110th in the world and is outstripped by several of its near neighbours.

It would not matter so much but the stakes for Brazil are enormously high. The tourism industry sits in fifth position in contribution to the balance of exports, coming close behind the automobile industry, notes Pires. And visitor spending is growing rapidly with a 74% hike between 2003-06 providing $4.3bn in income in 2006 with expectations of around $4.8-4.9 billion this year, she adds.

Not only that but potential is highest in the economically-backward north-east which suffers from migration to other parts of the country and depressingly high levels of poverty. Tourism could catalyse growth. Already, tourism in Brazil is estimated to employ 5.5 million, representing 6.4% of total employment. By 2016, this should total 6.9 million jobs.

The World Travel & Tourism Council President, Jean-Claude Baumgarten believes that Brazil needs to make the industry a strategic priority to enhance job creation and drive economic development. “Travel and tourism in Brazil has suffered in recent years from a lack of strategic vision and long-term commitment. We encourage the Brazilian government to redouble their focus and attention on the long list of policy issues from marketing and promotion budgets, to aviation policy, to investment incentives to safety and security that will make a real difference for our industry.”

Opportunities
Brazil has one of the largest underdeveloped stretches of coast in the world, particularly in the north-east. And while Brazil is further than the highly developed Caribbean, it lies considerably closer to both North America and somewhat closer to Europe than stronger performing tourist nations such as South-East Asia or Australasia.

Another bonus of the Brazilian tourism scene is the amount of options available beyond the resort. Emerging sun-n-sand tourist destinations such as Jamaica and the Dominican Republic are limited by security concerns mostly confining guests to resorts while small Caribbean islands are constrained in the numbers of attractions.
And visitor feedback is extremely positive, notes Pires. Of foreigners surveyed on departure from Brazil, 86% intend to come back to the country to visit other regions and a whopping 98% say they would recommend Brazil to friends and relative, although presumably some of this is out of politeness. Homebound visitors cite the happiness of Brazilians, the natural beauty and culture as the biggest pluses.

Furthermore, resort infrastructure is shaping up, driven in large part by Brazilian visitors who are becoming far more vital consumers in the domestic tourist industry. With the Brazilian economy continuing to grow at a decent clip of about 5% per year, more and more Brazilians are taking time off to holiday. The introduction of discount airlines, particularly fast-growing GOL, has accelerated trend. Access to cheaper credit with much lengthier staggered repayment periods is opening the possibility of second homes for wealthier Brazilians and encouraging the development of new mega resorts (see boxed article). The anticipated mixture of foreign and Brazilian growth and cheap prices for land has real estate developers scrambling to build portfolios.

Drawbacks
While the strength of the economy and range of options available to visitors are propelling the market forward, Brazil is still hampered by too many drags on tourism growth.

Violence is a deterrent for many foreigners visiting the country. Headline-grabbing Rio de Janeiro is particularly problematic with stories of assaults and worse routine. The grizzly story of Giorgio Morassi, an Italian tourist who was pushed into a street and run over and killed by a bus during a robbery in Rio de Janeiro in November is just one in a long line of stories that play on fears of Brazil’s out of control street violence. In fact, it’s not violence that most tourists who have visited the country say they found most off-putting: the two biggest negatives are public cleanliness and tourist information and security.

For newbies who have not been deterred by Brazil’s reputation for danger (or cleanliness and lack of tourist information), a host of more mundane problems awaits. For visitors from the United States, there is the hassle of getting a visa. Brazil has a juvenile tit-for-tat visa policy that imposes onerous conditions on Americans visiting Brazil. That means a cost of $100 for the visa, personal representation at the nearest consulate and processing times that are a minimum of seven working days. As Invest tur’s Carlos Guimarães points out, this has had the predictable effect of stymieing American tourism numbers to the country. “When you go to the beaches of the north-east, you find that almost all the tourists have come from Europe”.

Embratur’s Pires says that the two governments are working together to find a solution. That is unlikely to mean the dropping of visa requirements but could well lead to more flexible application procedures and visas of longer duration, perhaps 10 years, allowing multiple visits.

Other difficulties are the lack of international flights and the strength of the real. Flights have suffered because the country’s main carrier, Varig, was out of action for more than a year. There is also a dearth of flights from the US to the northeast of Brazil, the area most ripe for development. That’s changing, Pires says. There were 806 international flights in November and airlines including TAP, Air France and British Airways are using big aircraft that can each accommodate 30-50% more seats.

Infrastructure difficulties
Other factors have come to play a part in derailing growth too. The most obvious has been the air accident at SP’s Congonhas airport, which called into question the state of Brazil’s air safety and provoked havoc in the skies, although the worst is now over.

This had a predictable effect on passenger numbers aircrafts. The downdraft in passenger numbers came at an awkward time as airlines have been adding capacity fast. According to national civil aviation agency, ANAC, TAM witnessed a decrease of 7.1% in domestic demand year-over-year. The load factor on international routes fell by 11.5% too in August, year-over-year.

Guimarães admits to the difficulties plaguing Brazilian tourism development, particularly chaotic infrastructure and poor planning. Still, he says that even if the results are not yet in, there is a “strong intention by this government to invest in infrastructure, especially in the Northeast”. Under the growth acceleration programme (PAC), the Northeast is slated to receive $3 billion in funding. And senior local politicians get it, he says. He met six governors from the region and all of them say they have put tourism as one of main priorities. Pires agrees and adds that the Federal government and states are working hand-in-hand now to develop sustainable tourism. Ever the optimists, Pires and Guimarães expect the 2014 World Cup to be hosted in Brazil will help catalyse investments and bring in new tourists.

Funding for tourism slow-down
On the funding side, the boom in mega real estate developments across Latin America and the Caribbean may start to run aground as the subprime crisis in the US starts to sink the appetite of firms to extend credit. The weak dollar is having a predictable effect on US visits across the non-dollarised region, including Brazil.

John Tonelli, a managing director at Bear Stearns, notes that initially the effect of the subprime crisis was muted in all Latin markets. And even the more mainstream real estate lending markets were carried out at a very low loan to value. Furthermore, big projects were funded through conservative mechanisms and securitised that default rates remained very low.
Then the malaise in credit markets started to hit spreads including in Latin America by virtue of wider credit market problems. “We started to get some serious pressure and that resulted in a lower amount of issuance and wider spreads,” he notes.

The effect on funding for tourism projects is likely to prove negative as investors are wary of real estate transactions in general, especially those funding institutions that got burned in the US, Tonelli believes. He adds that what’s different in tourism is that deals are structured with protection that is not common in the US. Escrow accounts are funded with the complete amount to finish a project.

Kevin Clark, Senior VP, Corporate & Commercial Banking at Scotiabank, agrees that the other shoe has to drop in Latin America. He reasons that there is some complacency among Latin bankers as regards the possible severity of the impact on the region. “There’s bound to be a ripple effect in fixed-income markets,” he says. However, while US buyers may be less enthusiastic buyers both because of the weaker dollar and lower valued assets, Spanish, German and other Europeans should step in to fill the void. The only wrinkle there is that many European banks, including some that had been spending heavily to enter the hospitality market, are also tightening up on credit standards because of their exposure to North American real estate, he says.

Invest tur: the arrival of the mega resort

On July 16, shares in Brazil’s Invest tur shares began trading on the Bovespa’s Novo Mercado. The deal, despite its speculative nature, was snapped up with the over-allotment option was fully exercised, raising a total of US$504m through Credit Suisse in a deal that was initially slated to raise $360-410 million.

Highly unusually for a Brazilian IPO, Invest tur launched with a business plan and some incomplete negotiations for plots of land rather than as an ongoing concern. New York-based chairman Carlos Guimarães, chairman, who has a background as a fast-wheeling entrepreneur with long stints at Citibank, Lehman Brothers and the Inter-American Development Bank, admits that he IPO was unusual as the company was little more than a collection of brains with a business plan.

But Guimarães says it’s got off to a racing start, even if there is no solid proof of where it will land. “The company’s just four months old and we’re closing our ninth land transactions now,” he says. He believes the experience and the advanced stage of negotiations, turbo-ed with a big injection of cash will allow the company the pick of prime plots of beachfront land, still selling for a song in Brazil. Invest tur’s competitors will have to identify plots and study the viability of each project, a due diligence process that can take twelve to eighteen months. The head-start that this gives should enable Invest tur to be sitting on a land bank that in itself would be more than sufficient to guarantee profitability. He says the firm plans to sign one more deal this year (for a total of 10) with 10 more transactions completed next year.

“There are beaches here in Brazil, and I’ve been to them, that are as beautiful as any in the Seychelles,” he claims. That should help keep the growing number of Brazilians with the funds to buy a second home in the country. The Invest tur model is in line with current global trends to build an entire resort with an eye-popping range of amenities on site, often including golf courses, marinas spas and upscale shopping.

Still, not everyone is convinced that the company is a sure-fire thing. One São Paulo-based investor, who asked for anonymity, had taken a look at the deal when the prospectus came out. He gave it a pass. He thought that the Invest tur deal was symptomatic of the frothiness of the Bovespa market. “There have been a growing band of companies coming to market with very high earnings expectations and very little evidence to support that speed of growth.”

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